JANUARY 31, 2019

By Divya Avasthi

IN addition to the existing benefit of concessional GST available to low-cost houses constructed under the Pradhan Mantri Awas Yojana (Urban), the affordable housing segment received quite a boost under GST in the past year.

In alignment with the Government's aim of achieving "Housing for all" by the year 2022, various additional tax benefits under the GST law were introduced for the affordable housing sector.

Specifically, these benefits were extended to houses constructed or acquired under the Credit Linked Subsidy Scheme (CLSS) for Economically Weaker Sections (EWS); lower-income group (LIG), middle income group-1 (MIG-1) and middle-income group-2 (MIG-2) under the Pradhan Mantri Awas Yojana (Urban) and low-cost houses up to a carpet area of 60 square metres per house in a housing project that has been given infrastructure status. [1 Square Meter = 10.7639 Square feet]

In this article, we would be examining various issues concerning availment of beneficial GST rate of 12% (i.e., 8% after availing benefit of land deduction) in respect of services provided by way of construction of low-cost houses up to carpet area of 60 square metres in an "Affordable Housing project".

The relevant entry introduced with effect from 25.1.2018 in Notification No. 11/2017-CT(Rate) [Sr. no. 3(v)(da)] is reproduced below for reference:

"(da)... low-cost houses up to a carpet area of 60 square metres per house in an affordable housing project which has been given infrastructure status vide notification of Government of India, in Ministry of Finance, Department of Economic Affairs vide F. No. 13/6/2009-INF, dated the 30th March, 2017"

The above entry extends the benefit of lower rate of GST to low-cost dwelling units with carpet area up to 60 sq. m. in an "affordable housing project" The GST rate notification does not define "Affordable Housing project". It borrows the definition provided under Notification No. 13/06/2009-INF dated 30 th March, 2017 issued by the Ministry of Finance vide which infrastructure status has been given to "affordable housing projects".

Notification No. 13/06/2009-INF dated 30th March, 2017 defines "Affordable housing project" as under:

"Affordable Housing" is defined as a housing project using at least 50% of the Floor Area Ratio (FAR)/Floor Space Index (FSI) for dwelling units with carpet area@ of not more than 60 square meters.

Therefore, the key conditions for availing the benefit of the concessional rate are as under:

- Low cost houses up to a carpet area of 60 square metres.

- Housing Project using at least 50% of FSI/FAR for dwelling units with carpet area of not more than 60 square metres.

It should be noted that the relevant entry uses very generic terms, such as "low-cost" and "housing project". This leads to uncertainty while determining eligibility under the said entry.

The Ministry of Finance issued Circular No. 354/52/2018-TRU dated 7th May 2018 clarifying various issues regarding availability of concessional rate on affordable housing under GST.

With respect to one of the queries regarding requirement to obtain a certificate/approval for residential projects to qualify as having "infrastructure status", the circular clarified as under:

"Low cost houses up to a carpet area of 60 square metres per house in an affordable housing project, which has been given infrastructure status under Notification No. 13/06/2009 dated 30th March, 2009 of MOF (DEA), attract concessional GST of 8% (the value of undivided share of land is included in the price of the house). Whether the housing project qualifies as affordable housing project or not, shall be determined by the builder/developer as per the definition of affordable housing given in the above mentioned notification (i.e., affordable housing has been defined as a housing project using at least 50% of FAR/FSI for dwelling units with carpet area of not more than 60 sq. m.). No certificate from any authority is required."

(Emphasis supplied)

The above Circular merely clarifies that no certificate is required from any authority to claim the benefit of concessional rate in respect of affordable housing projects.

However, it does not clarify the issues which arise while interpreting the relevant entry. Let us now discuss some of these issues.

Whether houses constructed under an affordable housing project should also be "low-cost" in order to avail benefit of concessional rate?

The way in which the entry is worded, a doubt may arise as to whether the houses being "low-cost" is an additional condition for availing benefit of concessional GST rate or fulfilment of rest of the requirements mentioned in the entry would automatically mean that the condition of "low-cost" houses is fulfilled.

In other words, it is not very clear as to whether "low-cost" is an additional condition to become eligible for claiming beneficial rate of GST.

Further, the GST rate notification also does not define "low-cost" houses. The concept of "low-cost" housing is, at best, subjective. For instance, in a metro city, flats with a price of Rs. 40 lakhs to Rs. 1 crore would fall in the low or middle price bracket. Whereas in a non-metro city, flats with prices of even Rs. 25 to Rs. 50 lakhs might be considered expensive.

Typically, low cost housing has been viewed to mean housing for the economically weaker sections of the society. These days most housing projects are equipped with amenities such as swimming pool, club house, multi-level parking.

As of now, there is no clarity as to whether housing projects having such luxuries/amenities would also qualify as "affordable or low-cost" houses for the purposes of GST, if the other requirements regarding FSI consumption and carpet area of residential units are satisfied.

It is possible that the department might take a stand that merely fulfilling the definition of "affordable housing" is not enough and the houses constructed as part of the housing project should also be "low-cost" for becoming eligible for concessional rate.

What is a "project"?

The word "project" used in the entry has not been defined under the GST rate notification.

In the real estate industry, it is a common practice to undertake construction of housing projects in phases. As per the Real Estate (Regulation and Development) Act, 2016 (RERA), each phase is required to be separately registered with the Real Estate Regulation and Development Authority.

However, it is still unclear as to whether each phase of a township should be considered as a separate "project" and accordingly, beneficial rate of GST can be claimed in respect of each phase separately. In other words, there is a doubt as to whether the word "project" refers to the entire housing project or a "project" (i.e., a phase) for the purpose of RERA.

The GST notification is silent as to whether the concessional rate benefit would be available only in respect of new projects or the same is available even in respect of ongoing projects where some of the phases have already been completed.

For builders, it would certainly be beneficial to determine eligibility for concessional rate by treating each phase as a separate housing project. This would ensure that tax implications for one phase have no bearing on other phases of the housing project. It would also mean that the builders would be able to claim beneficial rate of GST in respect of ongoing projects wherein flats will be sold after 25.1.2018 as part of upcoming phases.

However, it is possible that the department may take a stand that the term "project" should be interpreted to mean the "entire project" as a whole and hence, eligibility for concessional rate should also be determined for the entire project.

In case the department takes this stand, it might create a problem for builders. The department might also deny benefit of concessional rate in respect of phases which are part of ongoing projects which had commenced prior to 25.1.2018.

Whether benefit of concessional GST rate can be claimed by sub-contractors?

The notification also does not indicate whether the contractors engaged by developers to undertake construction activity would also be eligible to claim beneficial GST rate of 12% on their services.

As a general practice in real estate sector, developers award lumpsum contracts to contractors for construction of RCC frame/structure, plinths etc. of the entire phase or building, which may comprise residential units with carpet area less than 60 square metres (i.e., eligible units) and units with carpet area more than 60 square metres.

Further, in case of lumpsum contracts, the contractors raise running bills on the developers for receiving periodical milestone payments.

In such cases, even if the project qualifies as an "affordable housing project", the contractor will face practical difficulties since there is no way of determining the actual consideration attributable to eligible residential units for claiming beneficial GST rate of 12%.

Conclusion

The introduction of concessional rate of GST for affordable housing projects is a welcome measure for the real estate sector. However, lack of clarity on the issues discussed above definitely poses difficulties for the developers in claiming the benefit of concessional GST rate.

Hopefully, the Government might clarify these issues in time and enable developers to avail the benefits intended to be extended to them by the Government.

(The author is Senior Associate, Lakshmikumaran & Sridharan, Mumbai and the views expressed are strictly personal)